frsbog_mim_v30_0409.pdf
Transcript of frsbog_mim_v30_0409.pdf
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MEMORANDUM RECOMMENDING A REGULATION PROVIDING THAT 4 0 9 NATIONAL BANKS MUST HAVE A MINIMUM CAPITAL OF
$50,000 AS A CONDITION PRECEDENT TO THE GRANTING OF TRUST POSTERS
By Mr. P i a t t .
Subsection k of Section 11 of the Federal Reserve Act - the subsect ion
r e l a t i n g to the g ran t ing of t r u s t powers to National "banks - was as o r i g in -
a l l y enacted very shor t - only four l i n e s . I t author ized the Federal Reserve
Board "to grant by specia l permit to National banks applying the re fo r when
not in contravent ion of S t a t e or loca l law, the r i g h t to a c t as t r u s t e e ,
executor, admin i s t ra to r , or r e g i s t r a r of stocks and bonds under such ru l e s
and r egu la t ions as the sa id board may p r e s c r i b e . "
I need not go in to the d i f f i c u l t i e s of the admin i s t r a t ion of t h i s broad
power, or i n to the l i t i g a t i o n which followed. I t i s s u f f i c i e n t to say tha t
there was controversy over the meaning of the words "when not i n contraven-
t i on of S t a t e or l oca l law." The Board a t f i r s t i s sued permits f o r the ex-
e r c i s e of t r u s t powers to banks with a cap i t a l smaller than t h a t requi red by
S ta t e laws i n some S t a t e s , and, as our records show, a few such na t iona l
banks are s t i l l exerc i s ing , or are author ized to exerc i se , the powers then
granted .
As a r e s u l t of the opposi t ion of the S ta te a u t h o r i t i e s and as a r e s u l t
of the l i t i g a t i o n and the Board 's own d i f f i c u l t i e s with r egu la t ions and
admin i s t r a t ion , the Act of September 26, 1918 g r e a t l y enlarged subsect ion k
of Sect ion 11 and both c l a r i f i e d and l i m i t e d the Board 's powers. The amend-
ment provided among other th ings " tha t no permit s h a l l be i ssued to any
na t iona l banking a s s o c i a t i o n having a c a p i t a l and surplus l e s s than the
cap i t a l and surplus requ i red by S ta t e law of S t a t e banks, t r u s t companies
and corpora t ions e x e r c i s i n g each powers," and i n add i t i on provided tha t " in
pass ing upon. a p p l i c a t i o n s f o r permission to exerc ise the powers enumerated
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"2" 410 in t h i s subsect ion the Federal Reserve Board may take in to considera t ion
the amount of c a p i t a l and surplus of the -applying bank, whether or not
such c a p i t a l and. surplus i s s u f f i c i e n t under the circumstances of the
case, the needs of the community to be served, and any other f a c t s and
circumstances t h a t seem to i t p roper . "
The Board was p r o h i b i t e d from grant ing t r u s t powers to banks with a
smaller c a p i t a l than the S ta t e laws p resc r ibed f o r S t a t e banks or t r u s t
companies competing, and the paragraph d i s t i n c t l y au thor ized the Board to
requ i re a l a r g e r c a p i t a l i z a t i o n than S ta t e laws requ i red i f thought advis -
able .
This a t once r a i s e s the quest ion whether the l i m i t a t i o n s of S t a t e
laws are i n a l l cases adequate, and a l so r a i s e s the quest ion whether there
i s good reason f o r the high c a p i t a l i z a t i o n requi red f o r t r u s t powers in
some s t a t e s , by comparison with o t h e r s .
Twelve s t a t e s r equ i re a minimum c a p i t a l i z a t i o n of a t l e a s t $100,000,
th ree of them r equ i r i ng $125,000. Fourteen other s t a t e s requ i re a t l e a s t
$50,000, one of them $60,000. I t should be added t h a t i n a few s t a t e s
where the minimum requirement i s much lower i t i s genera l ly impossible f o r
banks with the minimum requirement of c a p i t a l to exerc i se t r u s t powers
because of a h igh requirement of deposi t of s e c u r i t i e s with the S t a t e
Treasurer . For ins tance , I l l i n o i s allows banks with a c a p i t a l of $25,000
to exerc i se t r u s t powers i n c i t i e s of l e s s than 5,000 but i t s minimum r e -
quirement f o r deposi t of s e c u r i t i e s i s $50,000. We have given t rus t , powers
to one $25,000 bank i n I l l i n o i s , but i t i s n a t u r a l l y not exerc i s ing them*
The fol lowing s t a t e s requ i re $100,000 or more as a minimum:
C a l i f o r n i a . . . , $125 ,000 Hew York,. $100,000 Kansas 100,000 North Dako ta . . . . 100,000 Maryland. 100,000 Ohio. 125,000 M i c h i g a n . ( « U . P 9 Y 9 T ? ) . .150,000 P e n n s y l v a n i a . . . . 125,000 Montana. 100,000 West V i r g i n i a . . . 100,000 Hew Jersey 100,000 Digitized for FRASER
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The fol lowing requ i re $50,000, or "between $50,000 and $100,000:
Arkansas Colorado Connecticut F l o r i d a . . . .
I d a h o . . . . Louisiana
Georgia ( t r u s t C o s . ) . . 50,000
$60,000 Massachusetts 50,000 Mi s sou r i . 50,000 Minnesota 50,000 T e x a s . . . . 50,000 Washington 50,000 Wisconsin. 50,000 V i r g i n i a . .
$50,000 50,000 50,000 50,000 50,000 50,000 50,000
I t w i l l "be noted t h a t the s t a t e s with comparit ively high requirements
a re by no means a l l e a s t e rn s t a t e s : Ca l i fo rn i a , Montana, North Dakota and
Kansas a r e amon& the s t a t e s r equ i r ing $100,000 or more. Furthermore some
eas t e rn s t a t e s have low requirements, and one of them, Ehode Is land, none
a t a l l . In s p i t e of the absence of any c a p i t a l requirement f o r t r u s t
companies Ehode I s land has no National "bank with a c a p i t a l l e s s than $200,-
#00 exe rc i s ing t r u s t powers and according to the Bankers' Directory has
only four s t a t e t r u s t companies with a cap i t a l smaller than $200,000, the
smalleet of which has a c a p i t a l of $75,000. We have granted one permit
to a na t iona l hank wi th a c a p i t a l "between $50,000 and $100,000 "but i t i s
not yet adminis te r ing t r u s t s . There i s obviously no reason, so f a r as the
publ ic convenience i s concerned f o r small t r u s t companies i n Ehode I s l and .
New Hampshire and Vermont each aillow $25,000 i n s t i t u t i o n s to administer
t r u s t s "but i n New Hampshire the National hanks a t present a c t i v e l y in f r u s t
"business have a c a p i t a l l a r g e r than $50,000, with one except ion. In Vermont
two nat ional "banks of $50,000 c a p i t a l and one of $25,000 a r e . e x e r c i s i n g
t r u s t powers. The 16 o thers a r e a l l c a p i t a l i z e d above $50,000. There i s
obviously l i t t l e demand f o r small t r u s t companies i n e i t h e r of these s t a t e s
and the same i s t rue of Maine, which has no National banks of $25,000 with
t r u s t powers and only 3 with a c a p i t a l i z a t i o n of $50,000.
view of the high requirements of such western s t a t e s as Montana,
and North Dakota - $100,000 - s t a t e s which a r e sparse ly s e t t l e d by comparison
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; 4: with the Hew England. S ta tes , i t can hardly he maintained, tha t the s t a t e s
genera l ly "believe t h a t pub l i c convenience requ i res t ha t every community
should have an i n s t i t u t i o n author ized to administer t r u s t s , and the f a c t
that" a m a j o r i t y of the s t a t e s requi re a c a p i t a l of $50,000 or g rea te r
i nd ica te s tha t they be l ieve small hanks a re not as a r u l e so managed or
o f f i c e r e d as to he able to administer t r u s t s s a f e ly and s u c c e s s f u l l y .
I have dea l t with minimum requirements only and have not included
the surplus requirements of S t a t e laws, "because they seem as a ru l e un-
important - not adding g r e a t l y to the minimum c a p i t a l requirements» In
a few s t a t e s they never the less do much towards keeping the small "banks
from t r u s t "business. Seventeen s t a t e s requi re hanks exerc i s ing t r u s t
powers to deposi t s e c u r i t y with S ta te a u t h o r i t i e s . The e f f e c t of these
requirements might "be given f u r t h e r cons idera t ion , "but i t seems unneces-
sary to devote more space to them in the present memorandum.
S t a t e hanking super in tendents , as in Ca l i fo rn i a , have f r equen t ly
expressed the opinion t h a t small hanks cannot "maintain proper t r u s t
s tandards ." There i s of course d i f f e r ence of opinion as to what cons t i -
t u t e "proper t r u s t s tandards" and a d i spos i t i on in some s t a t e s to i n s i s t
tha t the bank should be l a rge enough, or tha t there should be s u f f i c i e n t
t r u s t "business i n the community to j u s t i f y 11 the employment of a s t a f f of
experts i n t r u s t bus iness . " Without subscr ibing f u l l y to t h i s view i t
i s evident tha t the c l e r i c a l f o r c e in the average small bank r a r e l y con-
t a i n s men who could q u a l i f y by any s t r e t c h of imagination as "experts*
e i t h e r i n t r u s t bus iness or i n banking. I t i s the view of the d i r e c t o r s
of the Federal Reserve Bank of Hew'York tha t a group of men may be well
enough q u a l i f i e d to conduct a l o c a l bank, but ma/ not be q u a l i f i e d to con-
duct t r u s t "business. The t e s t they apply i s the quest ion whether they
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i 413 would, "bo w i l l i n g to en t ru s t tho management of an e s t a t e or a t r u s t fund i n
which thoy v/ere i n t e r e s t e d to the group. Cer ta in ly something more i n a b i l -
i t y , i n charac ter and in f i n a n c i a l s tanding should he requ i red for Conduct-
ing f i d u c i a r y "business than f o r loca l "banking.
That the small "banks a r e ranch more l i a b l e to f a i l u r e than l a rge hanks
has "been amply demonstrated. Of the 5,004 hank f a i l u r e s from 1921 - 1928
i n c l u s i v e , 4434, or 90.7 per cent were harks with a c a p i t a l of l e s s than
$100,000. A hank may f a i l without l o s s to the t r u s t s administered by i t ,
and so f a r i t does not appear tha t there have been any los ses of t r u s t
funds due to National bank f a i l u r e s , but t h i s may be a t t r i b u t e d i n p a r t to
good, luck and. p a r t to the f a c t t h a t the banks having t r u s t powers which
have so f a r f a i l ed . (61 i n a l l ) have been comparatively few in number, and
had not ye t accumulated much t r u s t bus iness . More than 75 per cent of them
were i n f a c t not adminis ter ing any t r u s t s a t the time of f a i l u r e . Back of
ac tua l l o s s i s fur thermore a negat ive argument and. gives l i t t l e ind ica t ion
as to whether the t r u s t s have bo an proper ly managed. I have been informed
tha t not much i s ye t known as to the s e c u r i t i e s i n which the t r u s t funds
of f a i l e d banks were inves ted , beyond the f a c t t ha t there have been no
complaints to the r e c e i v e r s . About a l l tha t i s known i s tha t uninvested
funds were not l o s t . Such uninvested funds might e a s i l y be l e s t i f they
were not p roper ly segregated from the general funds of the bank, and small
banks, where t r u s t business and commercial business must be handled by the
same persons a r e l e s s l i k e l y to be ca r e fu l about segregat ion than banks
l a r g e enough to a f f o r d a s t a f f engaged so le ly i n the t r u s t bus iness . This
i s one of the chief concerns of our Reserve Board t r u s t department, and
banks a rc cons tan t ly admonished and required to maintain proper segregat ion, «
An Iowa na t iona l bank t h a t f a i l e d i n February was found to havo an uninvested
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unsocurod fund i n i t s tanking dopartmont only two wetiks before i t c losed .
To sum up: a ma jor i ty of the s t a t e s evident ly regard a c a p i t a l i z a t i o n
h igher than the minimum c a p i t a l i z a t i o n requi red f o r commerical "banking
necessary f o r t r u s t corporat ions "as a guarantee tha t t r u s t s w i l l be f a i t h -
f u l l y adminis te red ," and the s t a t e s which maintain t h i s p o s i t i o n a re as a
r u l e the s t a t e s with the bes t tanking s tandards . Should not the Federal
Reserve Board seek to r a i s e the s tandard f o r t r u s t powers i n s t a t e s where
i t i s now low, i n s t e a d of gran t ing t r u s t powers so le ly with r e fe rence to
the question whether s imi lar powers would he g ran ted by the s t a t e banking
a u t h o r i t i e s ? By fol lowing the l a t t e r course the Board undoubtedly runs
the r i s k of f u r n i s h i n g an argument towards the lowering of s t a t e s tandards•
The advocates of a lowering of the s tandard i n a s t a t e where i t i s now high
Can point to the f a c t t ha t i n an ad jo in ing S t a t e the Federal Reserve Board
endorses a lower s tandard by grant ing t r u s t powers to banks with a small
c a p i t a l i z a t i o n .
I t would appear t h a t bankers genera l ly , as well a s many of the S t a t e
superintendents of banking, a r e of the opinion t h a t small banks ought not to
^e permi t ted , or ought not to at tempt, to adminis ter t r u s t s . By comparison
With the l a r g e number of small banks i n exis tence , only a few have app l ied f o r
t r u s t powers and al though near ly a l l tha t have appl ied ha»ve be fn given p e r -
mission to a c t , a l a r g e ma jo r i ty of them remain i n a c t i v e . Of 76 $25,000
banks wi th t r u s t power 56 were inac t ive a t l a s t r e p o r t s .
Sec t ion 3.1-k, as amended in 1918 author ized the Board to consider
" the needs of the community to be served." Without going so f a r &s to say,
as the Superintendent of Banking i n Ca l i fo rn i a says, t h a t pub l i c o f f i c i a l s
charged with the duty of pass ing upon app l ica t ions f o r t r u s t powers "should
s a t i s f y themselves t h a t t h e r e i s s u f f i c i e n t business i n the community to
414
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; 415 j u s t i f y the employment of a s t a f f of exper ts i n t r u s t "business," the memo-
randum submitted, "by Governor Young on November 8, 1928 goes much too f a r
i% the other d i r ec t i on "by saying t h a t "outs ide of a few i s o l a t e d and c ross -
road casaEunities i n the United S ta t e s , the need e x i s t s i n every community."
Evidently a ma jo r i t y of the s t a t e s disagree with t h i s view, as I have ind i -
cated above, and i t seems c l ea r tha t the puh l i c w i l l be b e t t e r served i f
t r u s t business can continue to be administered by the l a r g e r , well equipped
i n s t i t u t i o n s i n s t e a d of being s c a t t e r e d among many small i n s t i t u t i o n s . There
i s probably some saving of expense i n the admin i s t ra t ion of an e s t a tq i f the
admin is t ra to r or executor i s a r e s iden t of the county of the decedent, but
there i s nothing to b e gained by having the admin is t ra to r or executor a small
town bank when there i s a l a r g e r , b e t t e r equipped bank only a few miles away.
In the admin i s t r a t ion of t r u s t funds genera l ly , apa r t from court t r u s t s , and
e s t a t e s i n process of se t t lement , the l oca t i on of the t r u s t e e bank i s gener-
a l l y unimportant to the b e n e f i c i a r i e s . Cer ta in ly the d i f f i c u l t i e s of super-
v i s ion w i l l be g r e a t l y increased i f the small banks genera l ly a re permi t ted
to adminis ter t r u s t s .
In the C a l i f o r n i a case submitted, and in every case where the Board
f i n d s a super intendent of banks adminis ter ing the law so as to enforce a
s tandard h igher than the minimum l ega l requirements, I be l i eve the Board
should adopt the same h igher s tandards . To do otherwise i s obviously to
f o r c e the s t a t e banking a u t h o r i t i e s to lower t h e i r s tandards i n order to
meet the competit ion of the lower National bank or Federal Eeserve s tandards .
F i n a l l y 1 be l i eve we should adopt the po l i cy of the ma jo r i ty of the
s t a t e s and should provide by regu la t ion tha t no n a t i o n a l bank with a c a p i t a l
l e s s than $50,000 be granted permission to adminis ter t r u s t s , and f u r t h e r
t h a t no na t i ona l bank with a c a p i t a l l e s s than $100,000 be gran ted f u l l t r u s t
powers un le s s an except ional showing i s made as t o the bank;*8 condi t ion and
management, a nd as to ttensed of an institution exercising trust pesos in fibs community. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis